Bloomin’ Brands, Inc. — Q3 2019 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 29, 2019, compared with the corresponding periods ended September 30, 2018. Dollar amounts are in millions unless stated otherwise. Bloomin’ Brands operates Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and Fleming’s, with U.S. and international reporting segments.
Financial performance
- Q3 revenue: $967.1, up 0.2% year over year. Restaurant sales were $951.8; franchise and other revenue was $15.3.
- Q3 earnings: Operating income was $22.0 versus $12.5; operating margin was 2.3% versus 1.3%. Net income attributable to Bloomin’ Brands was $9.2 versus $4.1; diluted EPS was $0.11 versus $0.04.
- Nine-month results: Revenue was $3,117.2, up 0.1%; operating income was $147.9 versus $123.8. Net income attributable to Bloomin’ Brands was $102.6 versus $96.2; diluted EPS was $1.14 versus $1.02.
- Restaurant economics: Q3 restaurant-level operating margin was 12.9% versus 12.5% (adjusted: 12.5% versus 12.4%). For the 39 weeks, the reported margin was 15.1% versus 14.8% (adjusted: 15.0% versus 14.7%). These are non-GAAP/management-defined measures and exclude certain expenses.
- Cash flow, 39 weeks: Operating cash flow was $180.9 versus $155.2; capital expenditures were $117.5 versus $146.3; net cash used in investing was $93.7 versus $124.3. Financing used $106.4 versus $77.0. Cash and cash equivalents ended at $51.4, down from $71.8 at year-end 2018.
- Debt and liquidity: Total debt, net, was $1,119.9, including $1,120.1 outstanding under the senior secured facility before discounts and issuance costs. Cash was $51.4 and unused revolving capacity was $316.0, net of letters of credit. The company reported compliance with debt covenants.
- Working capital: Current assets were $211.6 and current liabilities $790.8, for a $579.2 working-capital deficit. The company attributed roughly $170 million of the deficit to current lease liabilities recognized after adopting the new lease standard.
Changes versus the prior comparable period
- Q3 U.S. comparable sales declined 0.2%, while Brazil comparable sales rose 11.2%; U.S. traffic fell 1.0% and Brazil traffic increased 10.0%.
- Q3 U.S. segment revenue declined to $848.4 from $861.5, while international revenue increased to $118.7 from $103.5. International operating income rose to $10.6 from $7.8; U.S. operating income rose to $50.3 from $44.6.
- For the quarter, cost of sales improved to 31.6% of restaurant sales from 32.4%; labor improved slightly to 30.3% from 30.4%. Other restaurant operating costs increased to 25.3% from 24.6%, reflecting inflation, delivery rollout costs and the lease-accounting change.
- Operating income benefited from Brazil sales, cost savings and a $3.6 million gain on surplus property sales. Higher commodity, operating and labor costs, delivery expenses and the absence of prior-year sale-leaseback gain amortization partly offset those benefits.
- Lease accounting adoption added $1.3 billion of right-of-use assets and approximately $1.5 billion of lease liabilities at adoption; the company did not restate prior periods, so balance-sheet comparisons are not directly like-for-like.
Outlook, commentary and risks
- Management said expected liquidity sources should cover debt service, lease obligations, capital expenditures and working capital for the next 12 months and beyond, subject to revenue, cash flow, cost and working-capital performance. Estimated 2019 capital expenditures were approximately $175 million.
- The company is reviewing strategic alternatives, including a possible sale. No definitive timetable was set, and there is no assurance the review will result in a transaction.
- The filing provides no specific earnings or revenue guidance. The board declared a $0.10-per-share dividend in October 2019, payable November 27, 2019.
- Key risks cited include restaurant competition and consumer demand, wage and commodity inflation, food safety, cybersecurity, foreign exchange—particularly the Brazilian real—interest rates and substantial leverage, and the outcome of the strategic-alternatives review. The company reported no material change to the risk factors in its 2018 Form 10-K.
- Unusual items include the $3.6 million surplus-property gain, the sale of 18 Carrabba’s locations to an existing franchisee for $3.6 million in March, impairment and closure charges, and $106.992 million of share repurchases during the first 39 weeks. The company said it repurchased no shares in Q3.
- Management reported effective disclosure controls as of September 29, 2019, with no material Q3 change in internal control over financial reporting. It also stated that ordinary-course legal matters were not expected to have a material adverse effect; potential lease-guarantee payments were estimated at $32.8 million undiscounted, with no liability recorded.
Important facts for investors to verify
- Progress and potential outcomes of the strategic-alternatives review, including any effect on operations or shareholder value.
- Whether U.S. comparable sales and traffic stabilize, and whether strong Brazil sales persist after considering currency movements.
- Cash generation relative to capital spending, dividends, repurchases, lease obligations and debt repayment; also confirm borrowing capacity and covenant compliance.
- How much reported margin improvement reflects recurring operating performance versus property-sale gains, cost savings, impairments and lease-accounting effects.
- Exposure from lease guarantees, restaurant closures, deferred compensation obligations and variable-rate debt; assess the sensitivity to interest rates and foreign exchange.